A Fly in the Economic Ointment?

John Mauldin

The holidays are fading from memory, and 2018 is off to a good start, economically speaking. Most of the forecasts I’ve read expect a good year – not a blockbuster year or a horrendous one, but a mild pickup that ought to satisfy investors. Even the bears seem less confident than usual.

The holidays are fading from memory, and 2018 is off to a good start, economically speaking. Most of the forecasts I’ve read expect a good year – not a blockbuster year or a horrendous one, but a mild pickup that ought to satisfy investors. Even the bears seem less confident than usual.

The stock market is off to a rip-roaring start. For the first time ever, the Dow Jones Industrial Average has spent an entire quarter above its upper Bollinger band. That is, it’s more than two standard deviations above its 21-day moving average. You can click on the link for more detail. This might be a little technical for some of you, but it does demonstrate that there’s a great deal of exuberance in the market.

Tony Sagami

Further, Howard Silverblatt at S&P just came out with his forecasted earnings for 2018 (hat tip Ed Easterling for sending this to me). He revised 2017 earnings down by a few dollars to $110 as S&P analysts realized that companies are going to have to take write-downs for their deferred tax losses. But oh my is Howard positive about 2018. Look at this table straight from the S&P site. Focus on the reported earnings highlighted in yellow. Howard is expecting earnings to grow from $110 to $138 in 2018. That $28 jump in earnings represents about 25% earnings growth. If it actually materializes, the S&P 500 is going to be on a royal tear upwards.

Standard & Poors

The contrarian part of me wants to scream, “Aha! No one expects catastrophe, so that’s exactly what we’ll get.” While I don’t completely rule out anything, I’ve lived through several recessions and bear markets. This just doesn’t feel like another one. I can certainly see a correction in the markets as a possibility, but without a recession we would have a V-shaped recovery, somewhat like 1987’s or 1998’s. Annoying, but not portfolio-threatening.

In my own forecast (see “Economy on a Roll” if you missed it), I characterized today’s economy in terms of Newton’s first law of motion: An object in motion stays in motion until something interferes. I said the force most likely to change this economy’s course would be an overly hawkish Federal Reserve. However, we won’t know the Fed is too hawkish until we start seeing its policies depressing growth in some way. And remember, Fed policy generally acts with at least an 18-month lag time, so we would see the real effects in 2019. So where might we encounter an exogenous (outside) force? Today I have a possible answer, and it’s one we’ve met before.

Before we get to it, I want to share with you a short video message on my upcoming 2018 Strategic Investment Conference. Many of the people I have featured in my weekly Outside the Box letter will be presenting at SIC 2018, including Lacy Hunt, David Rosenberg, Louis Gave, and Niall Ferguson. Jeffrey Gundlach, and Mark Yusko are just two of the other luminaries will be sharing their latest insights with attendees at SIC.

I just finalized two of the panels yesterday, and I’m excited about them. The first one will be on the social fabric of the US and where the country is headed. It will feature three distinguished guests: Neil Howe, author of The Fourth Turning; Democratic political pollster Patrick Caddell; and the Heritage Foundation’s Steve Moore. In the run-up to the 2016 election Pat Caddell identified the angst among voters before any other pollster did. But rather than reexamine what happened in 2016, were going to be talking about 2018, 2020, 2024, and 2028. There are trends among the Millennials that have far-reaching implications.

The second panel will focus on cryptocurrencies and will feature John Burbank (who just set up a cryptocurrency fund) and George Gilder, a cryptocurrency fan and a man who has been at the forefront of every technological revolution for the past 30 years. Our own Jared Dillian, who is somewhat of a Bitcoin skeptic, will be moderating the panel. We are finalizing the third panelist.

I really hope you can make it to SIC 2018, held March 6–9 at the Manchester Hyatt in San Diego. It’s going to be a high-octane, intellectually thrilling three days. Here’s my video invitation:

Global Growth Cap

We’ll start with one more 2018 forecast that I haven’t mentioned yet. The World Bank’s annual Global Economic Prospects report forecasts that worldwide economic growth will be 3.1% in 2018. That figure breaks down to 2.2% in developed economies and 4.5% in emerging-market and developing economies.

Those numbers aren’t much different from others, but I bring them to your attention because the World Bank also suggests that we should get used to global growth in the 3% ballpark because it may be stuck there awhile. They believe global output is now approaching its maximum capacity, constrained by rising interest rates and full employment.

These factors are, in turn, the result of demographic and political forces. The world population is aging rapidly, and governments are not well prepared to support large numbers of retirees – nor are the retirees well prepared to support themselves. The populations of many countries are actually shrinking. Assorted barriers prevent labor and technology from migrating to the places where they can produce the most output. Unless something changes, the World Bank thinks the global economy will grow more slowly going forward than it has in the last 20–30 years – much as we’ve seen happening in the US the last few years.

Of course, 3% growth isn’t disastrous. It is far better than the subzero growth phases (i.e. recessions) we’ve come to expect every decade or so. We don’t need the great years as much if we have fewer bad ones – but I doubt the central banks will give us that happy outcome. They have models to follow.

Add constrained growth to the global picture and it looks less attractive. If the World Bank is correct that we’re near maximum output, nothing the Fed and its peers do will help very much. But they can still do things that hurt, and they almost certainly will. What might those missteps look like? You may already know.

Repeating History

History never repeats, but sometimes it rhymes. The trigger for our last recession and financial crisis was an excessively leveraged US housing sector. Other factors contributed, but home mortgages and housing speculation were at the core. So it’s easy to assume that the next crisis, whenever it comes and whatever causes it, won’t be about housing.

That may not be right, though. While US homeowners and lenders learned some hard lessons in the last crisis, and while I don’t see that kind of exuberance this time around in the US, I do see signs of it elsewhere. Canada is the most obvious case, but also Australia and parts of Asia and Europe.

Imagine this: Rising interest rates and reduced foreign capital flows combine to push housing prices down in places like Vancouver. Leveraged players who own speculative homes start to liquidate their properties, pushing prices down further. Banks find themselves holding properties they neither need nor want. The dominoes begin to topple.

So we might have another housing-driven crisis, but starting elsewhere. It would still affect the US, but differently from last time. Our healing ointment could turn out to have a fly in it.

Getty Images

Flying Blind at 20X

The housing sector has two characteristics that lead to these problems. First, it’s highly leveraged. In the US it’s common for people to buy houses with only 5% or 10% of the purchase price in cash, leaving the buyer instantly leveraged 10X or 20X. That’s asking for trouble even if the sale price is fair, and it’s often not.

Price is the other rub. Houses are illiquid because transactions occur infrequently and each property is unique. They aren’t like shares of stock. You can look at tax valuations and appraisals, but those are estimates. You can’t really know a house’s value until you try to sell it.

Flying blind at 20X leverage is not the ideal way to learn about investing, but that’s how many Americans do it. We’ve even convinced some of our closest neighbors and allies to adopt our ways. Last week Josh Steiner of Hedgeye kindly sent me a slide deck he assembled on housing in Canada, Australia, and the US. It was a revelation.
Consider the following chart. Note the sidebar: On a relative basis, broker commissions and other ownership transfer fees have now eclipsed levels reached during the US housing peak. Those fees are now 3% of Canadian GDP! Really? How is that producing anything other than income for brokers?


The two lines represent real estate transaction costs in the US (brown) and Canada (black), as a percentage of GDP. We see that the costs peaked in the US in late 2005, then fell rapidly the next couple of years as the economy tumbled into recession.

Canada was less exuberant at the time; but, post-recession, housing in Canada climbed far faster than it in the US. By early 2017, Canadian homebuyers and sellers were spending as much on housing, relative to their economy’s size, as the US did at its 2005 peak.
Meanwhile you have the Bank of Canada raising rates, slowly but surely. This seems like an ominous combo.

Now, you could argue that Canada has something the US didn’t: cash-bearing Chinese buyers. Those buyers might make higher interest rates less harmful to home prices. True enough, but other things could discourage prices. We’ll come back to that later.

The situation in Australia is even crazier, at least as Josh describes it. He works with an indicator that never occurred to me: crane count. The number of cranes operating in a city and the kinds of properties they are being used to build turns out to be a pretty good measure of housing activity.

The chart below shows the crane count for Australia’s four largest cities. As of three months ago, Sydney alone had 350 cranes being used to build high-rise residential properties. That’s more cranes than were deployed in all of North America’s twelve largest cities. Construction is booming in Australia. In fact, the comparison is even more stark. On a per capita basis, Australia has 14.6 times as many residential construction cranes working as North America does. 


It gets crazier still. Australians engage in “negative gearing.” For tax reasons, people intentionally buy investment property that produces losses. We do that in the US, too, but we have ways to keep cash flow positive even as properties produce tax losses. In Australia, investors get interest-only loans to buy properties, then rent them for less than the loan payments and absorb the difference. They think they will make it up by selling at a profit.

Josh Steiner describes it this way:

Negative gearing is (and should be) a truly bizarre concept to an investor, but it makes perfect sense to most Australians because home prices have only gone up for the last 25 years. There is a pervasive and genuine belief that they can’t lose.

If this is right (and I’m sure my Australian readers will tell me), it will likely end in disaster. But actually, I get why younger Aussies might think this way. Those under 40 have never seen a recession in their adult lives. They have seen a resource-driven boom as Australia exported staggering quantities of raw materials to China. That incoming cash kept the country afloat even as others sank. It’s easy to think that condition is normal if you’ve never known anything else.

Good times never last forever… which brings us to China.

China Chills

People have been predicting Chinese real estate crashes for years. Eventually they will be right. Is that time approaching? Here’s the lead from a January 16 Wall Street Journal story, “China’s Hot Housing Market Begins to Cool.”

BEIJING—China’s housing market has defied gravity and government restraints for two years, floating on a tide of bank loans and speculation. Until now.

In Beijing and Shanghai – two of the country’s largest markets – and other megacities, sales have stalled and prices have dropped, falling slightly in some pockets and dramatically in others.

Demand has dried up in these areas as a result of government measures including higher mortgage rates, higher down-payment requirements and limits on buying a second or third home. Would-be sellers are increasingly putting plans on hold in hope that prices will rebound.

That doesn’t sound good at all. WSJ backs up the gloomy language with data, though:


Some of this shake-out is happening by design as the government tries to manage growth on a sustainable path. The picture also varies greatly by city and region.
Beijing and Shanghai are China’s equivalents of Washington and New York – except that they are much, much larger. What happens to them affects the whole country to some degree – and other countries, too.

By some estimates, China’s property market accounts for a third of GDP growth.
Falling construction activity will mean less need to import construction materials from Australia – and maybe fewer Chinese buyers in Canada. Falling demand won’t be good for housing prices in either of those places.

Then there are wild cards. President Trump has so far held back on promises to crack down on trade with China, in part because he wants Beijing’s help managing the North Korea issue. I doubt he will wait forever. He has a lot of latitude to impose tariffs, quotas, and other restrictions on China. Ironically, a peaceful resolution on the Korean Peninsula might be economically negative if it removes a barrier to trade war.

We haven’t even talked about housing in the UK or in Europe. London home prices are crazy and have been so for years. Ditto for many places in the EU. The European Central Bank is still accommodative for now, but it won’t be forever. Between higher rates and fewer oligarchs buying mansions, Europe could see trouble, too.

As I said earlier, the housing market is inherently opaque. We can look around and see craziness everywhere, but it can get crazier still. Calling the top is hard. It took a couple of years for the US carnage to become obvious last time. I don’t foresee imminent disaster, and it’s possible these international markets will deflate gradually and not spark a crisis. But given the propensity of central bankers to overplay their hands, the risk is significant.

And that takes us back to the very beginning of the letter. The World Bank is forecasting roughly 3% global growth. If some of the main drivers of global growth experience recessions, that is going to slow growth and reduce US exports and total global trade. And analysts are going to have to reduce those projected earnings I highlighted at the beginning of the letter.

Plus, if the Federal Reserve insists on raising interest rates in that environment, while reducing their balance sheet and slowing the growth of M2 and the monetary base, they are going to be effectively tightening monetary policy in the US far more than by simply raising rates 75 to 100 basis points.

Federal Reserve Bank of St. Louis

A lot of factors go into the monetary base. When the US Treasury deposits or removes money from its account at the Fed, that changes the monetary base. When you take money out of your bank and or put it in, that affects the monetary base.

Same for large corporations. The monetary base is an exceptionally noisy set of data.

But in general, we can see that each Federal Reserve rate hike has reduced the monetary base by about $50 billion over time. If the Fed’s tightening trend continues (and there are very good reasons to think that it could actually increase), we could see another $150 billion reduction in the monetary base.

In addition, this latest federal tax cut is deficit-financed. The Treasury is going to have to borrow an extra $150 billion in addition to the deficit that’s already in the budget. And that figure assumes they receive the increase in revenue they are expecting from the tax cuts and from growth. It remains to be seen whether they will actually see additional revenue; I expect more people than they think are going to “game the system.” That is just what taxpayers do.

(I can guarantee you that I am sitting down with my accountants, and we are trying to figure out what we can do to reduce my taxes under the new law. Whatever actual tax cut I can get is going to have to be used to pay the additional taxes I’m going to owe from the loss of deductions of state and local taxes. Right now, unless we can figure out how to game the system, my actual out-of-pocket tax bill will be about the same.)

Further, the Fed is going to reduce its balance sheet $60 billion this quarter, $90 billion in Q2, $120 billion in Q3, and $150 billion in Q4. They have already said they are not going to discuss that issue further in FOMC meetings, so those amounts are baked into the cake. That is an additional $450 billion out of the monetary base.

I’m not going to get too wonkish on you here, but those reductions in the monetary base are going to have an effect on the M2 money supply. The growth rate of M2 is already down from its normal 7% to around 2%. The Fisher equation basically tells us that GDP is equal to the money supply times the velocity of money. It is not entirely out of the realm of possibility that the growth of M2 will go negative. Unless there is a corresponding increase in the velocity of money (something we have not seen for a long time), that negative monetary growth could spell an actual recession.

The moves the Fed is making are flattening the yield curve. With all of the monetary background noise that I’ve been detailing, it is not entirely clear that the yield curve will remain positive. The Federal Reserve seems unconcerned that quantitative tightening will have the opposite effect that quantitative easing did. I have seen no work or research from the Federal Reserve on that topic. I know I have said this before, but I just don’t see the fire that the Fed is so intent on putting out. I can understand their reasoning for raising rates, but I don’t understand why they have to reduce their balance sheet at the same time.

The factors I’ve reeled off are not going to produce a recession in 2018 (at least I don’t think so), because monetary policy acts with a long lag time. But Republicans are not going to be very happy if they see a recession in 2019 or 2020, as there will be no time to make any corrections before the 2020 election, and they will get blamed. That you can take to the bank. And Trump won’t be able to pass the blame to the Fed, because it will be a Fed that he appointed.

All that said, every time I have a conversation with manufacturers or folks in construction, their biggest complaint is they can’t get enough workers. Businesses are booming all over this country. A great deal of that activity stems from the reduction in regulations and from the less stringent enforcement of regulations on the books. It is making a difference. And while I may moan about tax cuts not helping me, those cuts are going to make a big difference to people at the lower end of the income scale; and, more importantly, they are going to make a big difference to corporations.

Maybe, just maybe, we could actually see some expansion in capital expenditures, especially as a lot of overseas money comes back to the United States. That influx will be a one-time major boost to tax revenues!

So I still think we approach 2018 feeling relatively optimistic – but just watch the Fed, the yield curve, the velocity of money, and M2. It is not entirely out of the question that the Fed might reverse course and decide we don’t need as much tightening as they had planned on. I keep trying to figure out where all this inflation is going to come from. Maybe from energy prices in the short term, but wage inflation? That just doesn’t appear to be happening yet. Let’s hope it does – higher wages would be a good problem to have.

Sonoma and San Diego

I will be in Sonoma with my friends at Peak Capital in late February and then of course in San Diego for my conference, where I will arrive a few days early and maybe stay an extra day just to relax from the adrenaline rush.

I had an extraordinarily good time in Boston, meeting first with my Mauldin Economics management team, Olivier Garret and Ed D’Agostino. They started out with good news on the revenue front, which of course made me happy; and then I could see they were a little worried about what they were going to say next. They really did have some significant changes they wanted to implement, and I think they were pleasantly surprised that I not only agreed, I was quite enthusiastic about what they proposed. One change is that we are going to be sending you fewer items to your inbox. Every piece of research we do shows that everybody is overwhelmed with the amount of material they are getting, and we are going to try to make sure that when you get something from us it is of really high quality.

One thing that will not change is that Thoughts from the Frontline will still be free, and they are going to help me readjust my schedule so that when you wake up on Saturday morning, the letter will be in your inbox, the way it was back when I first wrote TFTF, some 18 years ago.

The publishing industry has changed dramatically over the last 40 years. I have been involved in one aspect or another of that industry for that whole span of time. I obviously enjoy writing and publishing, or I would have given it up years ago.

Most of all, I enjoy meeting readers everywhere I go. When I sit down to write, I imagine that I am writing to one person – you – and I’m just talking to you as a friend, sharing my thoughts. I really do feel that personal connection. And I enjoy reading your responses and trying to incorporate them into my thought process. Thanks for being one of my readers and, more importantly, my friend.

And with that I will hit the send button. Have a great week!

Your enjoying being optimistic analyst,

John Mauldin

The Blight House

Trump's Presidency Sinks Below Rock Bottom

By Christoph Scheuermann

U.S. President Donald Trump

More controversy than usual has been swirling around the White House since the beginning of 2018, with Donald Trump losing his temper over a book accusing him of being an ignorant, TV-addicted narcissist. The bad news, though, is that he's not going away anytime soon.

Stephen Miller is one of the people charged with convincing the world that everything is just fine, and nothing is out of the ordinary. The White House speechwriter went on CNN a week ago Sunday for a live interview to comment on "Fire and Fury," the new book about U.S. President Donald Trump by the journalist Michael Wolff. The tome presents the president as psychologically unstable, as dumb, senile and dangerously erratic. "The book is best understood as a work of very poorly written fiction," Miller said. "The author is a garbage author of a garbage book."

Miller is 32 years old, but with his thinning hair and polished visage, he looks like he could be in his early 50s. During the election campaign, he flew back and forth across the country with Trump. "The reality is that the president is a political genius," Miller said. The accusations leveled in the book, he went on, are grotesque, particularly the quotes attributed to Stephen Bannon, Trump's former chief strategist, who Miller denounced as being "vindictive." During the course of the interview, he got so worked up that the anchor, Jake Tapper, finally put an end to it, with security guards ultimately leading Miller out of the studio.

Miller's appearance shows the absurd depths to which the debate over the Trump presidency has sunk. There was, though, at least one viewer who enjoyed the speechwriter's fit of rage. "Jake Tapper of Fake News CNN just got destroyed in his interview with Stephen Miller," Trump tweeted. Just a few hours earlier, he had sent out a series of tweets seeking to assure the world of his excellent mental health. He accused the Democrats and their media "lapdogs" of only questioning his mental stability because, as he claimed in a tweet, suppositions of collusion with Russia have "proven to be a total hoax."

"Actually, throughout my life, my two greatest assets have been mental stability and being, like, really smart," he tweeted on Sunday morning. He wrote that he went from being a "VERY successful" businessman to TV stardom and then to the presidency. "I think that would qualify as not smart, but genius....and a very stable genius at that!"

Of course, that's not how a healthy person talks -- it is the voice of mania. And the patient, unfortunately, is the most powerful man in the world, a man who is resented even by his closest aids. Secretary of the Treasury Steven Mnuchin called Triump an "idiot." Gary Cohn, Trump's chief economic adviser, said the president is "dumb as shit," and National Security Advisor H.R. McMaster described Trump as a "dope." All of these quotes are from "Fire and Fury," and there could hardly be better corroboration of their veracity than Trump's outbursts on Twitter and elsewhere. Trump's behavior is childish, and he has now become obsessed with a book that he hasn't even read, nor is he likely to.

Incidence of Lunacy

Yet the real-life satire that Trump and his team are currently staging isn't just another incidence of lunacy. It is a deeply problematic political headache that raises fundamental questions.

How powerful can a superpower be when its leader is beset by increasing calls for his dismissal? Such a thing is possible, in theory at least, either through impeachment or the application of the 25th amendment, which allows for the replacement of a president who is no longer in a position to fulfill his duties for reasons of physical or mental health.

More important, however, is the question as to how Trump -- if he gets this upset because of a book -- might react in a real crisis. What might he do if North Korean dictator Kim Jong Un lays down the gauntlet? Can Trump really be trusted with control of America's nuclear arsenal?

The West, it is clear, finds itself in an extremely dangerous situation with this president at the helm in the United States. With his erratic style, Trump has destabilized the alliance with Europe and put wind in the sails of the West's enemies, including autocrats in China, Russia and the Middle East.

His trips abroad have shown that he feels more comfortable in Riyadh than in Brussels, that he has more fun doing the sword dance with princes than having dinner with German Chancellor Angela Merkel. Trump has transformed the U.S. into a country without a leader. There is hardly a diplomat or head of government anymore who takes what the president says seriously. America can no longer be relied upon.

In just 12 months in office, Trump has made a nuclear war with North Korea conceivable and undermined the principle of international cooperation by terminating trade deals, weakening climate protection, cutting funding for UN organizations and questioning the nuclear deal with Iran. In doing so, he has not only endangered the Western model, but also liberal democracy itself.

And as Wolff's book shows, it all comes out of a combination of ignorance, narcissism, hunger for power and a lack of compassion. The book's publication marks a new low point in U.S. history -- even for those who thought the country had already hit rock bottom.

Surrounded by Sycophants

Trump, of course, isn't the first occupant of the White House who has been sick, complicated or difficult to tolerate. Richard Nixon was widely seen as short-tempered, as a liar and an alcoholic. Many questioned Ronald Reagan's health even before he took the oath of office. And Bill Clinton used his power for sexual escapades.

It also isn't a new phenomenon for presidents to surround themselves with sycophants who then speak poorly of their boss behind his back. What is new, though, is the cynicism with which Trump's advisers serve a man who they see as incompetent, crazy and sick. Wolff writes that White House staff members discuss on a daily basis which statements uttered or actions taken by Trump might trigger the invocation of the 25th Amendment. Trump, he writes, isn't mentally fit enough to carry out his duties, nor did he really want to win the election in the first place. He was, the author asserts, only interested in increasing the value of the Trump brand.

Wolff describes a dysfunctional White House that oscillates between hysteria and chaos. He speaks of bitter infighting between Bannon and "Jarvanka," a reference to Trump's daughter Ivanka and her husband Jared Kushner. He writes of feuds, leaks and an uninterested president who retreats to his bedroom at 6:30 p.m., eats cheeseburgers, watches Fox News, talks to friends on the telephone and vents on Twitter.

Wolff's main character and likely his most important source is Stephen Bannon, who was Trump's chief strategist until last August and who was widely considered to be the most powerful man in the White House after the president himself. Trump's Mephisto. Indeed, it is Bannon's quotes in the book that have angered Trump the most. In an official White House statement, he wrote: "Steve Bannon has nothing to do with me or my Presidency. When he was fired, he not only lost his job, he lost his mind."

Joshua Green says that Bannon simply wasn't cautious enough in his conversations with Wolff. Green is a journalist with Bloomberg Businessweek and knows Bannon better than almost anyone else. Last July, he published "Devil's Bargain," a bestseller about the Trump-Bannon alliance. Bannon's ego, says Green, is just as large as that of Trump -- and he ultimately fell victim to his own narcissism.

Even former Bannon supporters have begun casting doubt upon the role he played as a Trump adviser. Trump's agenda had long been established before Bannon came on board, Roger Stone, a long-time Trump adviser said in an interview with Fox News. From Fox News to the conspiracy-theory worlds of websites like InfoWars and Gateway Pundit, Bannon is now being portrayed as unstable and self-absorbed.

A Self-Proclaimed Revolutionary

Green, though, doesn't believe that Bannon's influence on Trump was overstated. The president, he says, has always been plagued by a fear of losing his connection to his base and Bannon, via Breitbart, provided an important link to his voters. "But Wolff's book enraged Trump to the point where it didn't matter to him anymore who Bannon was," he says.

Bannon's fall began last April, when Kushner and McMaster pushed him out of the National Security Council. In August, he was then forced to leave the White House. Even after that, though, Trump continued to maintain contact with Bannon. But now, the one-time presidential adviser has been excommunicated by the right wing, his half-hearted apology notwithstanding. The family of the arch-conservative hedge fund manager Robert Mercer, who holds a stake in Breitbart and who donated millions to the Trump campaign, withdrew his support for Bannon. Not only was Bannon forced to leave Breitbart (his "killing machine," as he called it), he also lost his radio show.

The self-proclaimed revolutionary and destroyer of the establishment now finds himself without a platform for his ideas about withdrawing America from the international community and the greatness that allegedly grows out of isolation. But it doesn't appear as though he is going to disappear entirely.

After being thrown out of the White House, Bannon went on a world tour, to Hong Kong, Tokyo and Abu Dhabi. Green says he can imagine Bannon taking a closer look at Europe with the intention of providing his services to populist parties there. "He closely followed the careers of Frauke Petry and the AfD," he says, referring to the German right-wing populist party Alternative for Germany and its one-time leader. Green says Bannon has also kept an eye on Marine Le Pen in France and Beppe Grillo in Italy. Bannon, Green is certain, will land on his feet.

"Plus, there are always rich people looking for influence and for a way to get in," he says.

The ideologue remaining from Bannon's "nationalist revolution" is Stephen Miller, a man who, Wolff asserts, is unable to write in complete sentences, communicating instead in bullet points. According to an account in the book, Bannon used to refer to Miller as "my typist." He is the opposite of an intellectual, as unlikely to read a book as the president.

The President's Thin Skin

Many of the problems Trump has can be traced back to his inability to recruit able advisers. And even those who do work hard on his behalf are treated as serfs.

His treatment of Reince Priebus, his former chief of staff, is symptomatic. Priebus knew that he was going to be fired, but he wanted to ensure a smooth succession rather than a sudden break. On the return flight from an appearance in New York on board Air Force One, the president urged Priebus to take his time. "You tell me what works for you," Trump said, according to Wolff. "Let's make it good." But just a few minutes later, after they had landed, Priebus checked his mobile phone and found a tweet from Trump, saying that John Kelly had been named the new chief of staff.

The degree of carelessness Trump has displayed when choosing his closest advisers can best be seen in the recruitment of his national security adviser. It's one of the most important jobs in the White House; the adviser is charged with presenting options to the commander-in-chief, many of them having to do with military strikes or secret operations.

Trump's first candidate, Michael Flynn, was forced to resign after just 24 days because he had lied to the vice president about a meeting he had held with the Russian ambassador to the U.S. After Flynn's departure, Trump invited the former diplomat John Bolton to an interview. Bolten is a hardliner with experience in both foreign and security policy; he was the U.S. ambassador to the United Nations for a time under George W. Bush. But there was something about Bolton that Trump didn't like, Wolff writes: his moustache. "Trump doesn't think he looks the part," Bannon said, according to the author.

Kushner then proposed McMaster, a short, heavyset, bald veteran of the Gulf War, a man who wrote his Ph.D. thesis on the Vietnam War. McMaster's weakness, though, is his fondness for lecturing and he held forth about global strategies during his interview with Trump. "That guy bores the shit out of me," Trump allegedly said afterwards.

When the general showed up the next day wearing a rather loosely cut suit instead of his uniform, Trump noted that he looked "like a beer salesman," according to Wolff. He was only convinced that McMaster had been the right choice after he cut a good figure on morning television a short time later.

The 'Billionaire Chorus'

Cable television is Trump's window to the world and he installed a trio of TVs next to each other in his bedroom. Wolff describes how the president mutes the sound in the evening to talk on the phone with what the author calls the "billionaire chorus," Trump's superrich friends to whom he feels the closest link. Trump and his wife Melania sleep in separate bedrooms, which makes good sense given the amount of time Trump allegedly spends on the phone.

In fact, Wolff dedicates considerable space in his book to the bedroom. Trump, he writes, is fond of saying that one of the things that makes life worth living is getting your friends' wives into bed. During his time as a businessman, he allegedly found immense pleasure in the sport. He would sound out friends about their sex lives in his office while their wives listened in on the speakerphone. It's a pasttime that likely ruined more than one relationship, and Trump was then able to jump in to provide consolation.

Wolff writes that Trump's brain seems "incapable" of performing some of the simplest of tasks. "He had no ability to plan and organize and pay attention and switch focus." On a basic level, he writes, "he simply could not link cause and effect." He also lacks all matter of empathy, which can at times lead to some comical scenes.

Once, Wolff writes, Bannon and Ivanka Trump were standing in the Oval Office when Bannon yelled at her, calling Ivanka a "fucking liar." Instead of defending his daughter, the president quipped, "I told you this is a tough town, baby." That was the end of the matter in his mind.

It's scenes like that which make the book so juicy. "Fire and Fury" doesn't deliver much in terms of surprises or new information, and politics is not the focus. Wolff seems to be most interested in intrigues, scandals and the question of who hates whom and why? The author himself is an odd beast in the New York media world, bald-headed, diminutive and with alert eyes. A journalist who abhors other journalists, particularly if they work for the New York Times.

Wolff despises what he sees as a moderate, leftist-liberal consensus among the political and journalism elite in New York and Washington. He has carved out a niche for himself with his columns, which range between polemical and toxic and are sometimes even directed at other journalists. He's not known for balanced viewpoints or for maintaining confidentiality, thus violating the rules of the trade. Journalists in Washington detest him as a result.

Indeed, it didn't take long before other journalists began sifting through his book on the hunt for mistakes, and they found quite a few. Still, the broad consensus among White House correspondents is that Wolff's depiction of the inner workings of the Trump administration is accurate for the most part.

Wolff loves gossip, salacious stories about winners and losers. That's what drew him to Rupert Murdoch, the media-shy media mogul, about whom he wrote a critical book in 2008. Murdoch opened up every door to Wolff, even granting him an interview with his mother, apparently believing he would be able to control the reporter. But when the book came out, Murdoch was outraged and he still harbors deep animosity toward Wolff to this day.

Fly on the Wall

That episode is particularly revealing because it shares a lot of parallels to the current controversy surrounding the Trump book. In this case, too, a billionaire thought the reporter would identify with him and he granted Wolff with access to the White House, where Wolff spent weeks as a fly on the wall, plopped down on a visitor's sofa and soaking up all the gossip. No one asked him what he was doing there -- assuming that the president was alright with his presence. For his part, Trump had probably already forgotten completely about Wolff.

Exposé books about the inner workings of power are a well-established genre. Bob Woodward of the Washington Post, who uncovered the Watergate scandal, has filled many a book with West Wing indiscretions. Every president has suffered under the urge their confidantes and staffers have to spill the beans. Paul O'Neill, who served as treasury secretary under George W. Bush, described his former boss in a book as a "blind man in a room full of deaf people." Former Bill Clinton adviser George Stephanopoulos painted an unflattering picture of a president caught up in a maelstrom of extramarital affairs. And former CIA director Leon Panetta described Obama as "vacillating and overly cautious."

No president likes it when advisers talk. But no other president has been as thin-skinned and overwrought in their reaction to those revelations as Trump. After publication of Wolff's book, Trump announced he would take a "strong" look at U.S. libel laws. What he would probably prefer to do, though, would be to put his critics on trial and ban the publication of their work, just as his friends in Ankara and Moscow do.

Thinking Like an Autocrat

Trump thinks like an autocrat -- he neither knows much nor cares much about the Constitution. Astoundingly, though, the Republican Party continues to stand behind him. Indeed, a bizarre wave of solidarity followed the publication of Wolff's book.

As recently as this summer, Senator Lindsey Graham could still be heard describing Trump as a "xenophobic, race-baiting, religious bigot." He has since become a full-fledged fan of the president. And his Senate colleague Bob Corker, who unleashed on Trump only a few months ago, decrying the president as "mentally unfit" for the job, smiled together with Trump last Monday as they boarded Air Force One.

The two flew to visit farmers in Tennessee -- an attempt by Trump to generate headlines and get ahead of the news cycle. As is often the case, he wasn't particularly adroit in his delivery. "Oh, are you happy you voted for me?" he asked. "You are so lucky that I gave you that privilege."

In recent days, Trump has been sending out contradictory messages. On the one hand, he's pleading for the wall to be built along the border to Mexico and he wants to deport 200,000 immigrants from El Salvador. On the other, however, he says he is open for compromises on issues like the "Dreamers," who came to the U.S. illegally as children.

Last Tuesday, he then invited Democrats and Republicans to the White House to negotiate the issue. Normally, those types of talks take place behind closed doors, but Trump invited the press to attend. A bizarre situation ensued in which the senators discussed the issue with the cameras running as Trump sat there with his arms crossed attempting to come across as a bipartisan leader.

That same day, he announced he would travel to the World Economic Forum in Davos, the meeting point for the global financial and political elite -- a gathering that represents the root of all evil for people like Steve Bannon. And on Wednesday, it appeared suddenly as if Trump might actually reconsider his plan to withdraw from the Paris climate agreement. Then, in a Thursday tweet, he appeared to want to limit the power of the intelligence services, only to reverse that a half-day later. Shortly after, he asked why the U.S. had to take in so many immigrants from "shithole" countries.

It's hard to tell these days what Trump wants and who he wants to be. A hardliner? A dealmaker who transcends the bickering among the parties? Or a softy who is liked by everyone?

It's likely that he doesn't have an answer to that question himself.

Impeachment More Unlikely Than Ever

But one thing is certain: At the moment at which it appears the president is most vulnerable, the idea of impeachment seems more unlikely than ever.

Despite the fact that Trump is disastrous for his country and the world, the fact that he is fulfilling many of their most heartfelt wishes has meant that Republicans lack the will to distance themselves from him. Trump supported tax reforms that would supposedly ease the burden on the middle class but are really the equivalent to writing a check worth billions to the wealtiest people in America. The U.S. economy is growing, and the Dow continues to break records. He has appointed officials who are hard at work dismantling environmental and climate protection measures -- moves celebrated by Republicans who view such regulations as unnecessary, and rolling them back can help them attract campaign donors. The fact that Trump's popularity ratings are terrible seems irrelevant.

If the Republicans were to oust Trump now, it's likely they would lose the mid-term elections this November. They would no longer be able to push through any major policy initiatives and their prospects for re-electing a Republican president in 2020 would be deeply imperiled. So, it's unlikely the party will move to trigger the 25th amendment. Besides, removing a president from office under that amendment requires the agreement of a majority of his cabinet or a vote in Congress, which also doesn't appear likely.

The Democrats themselves don't even appear to harbor such hopes. Even as the media spent days with blanket coverage of Wolff's book and Trump's outbursts over it, the Democrats showed odd restraint.

Former Obama foreign policy adviser Dan Restrepo argues this is the best strategy for dealing with populists. "The Democrats are focusing on things that really matter to people in the country," he says in a phone interview. "They don't participate in the daily political theater of Washington and that's the best solution, both strategically and tactically." In any case, he says the entire country has been aware for a year now that Donald Trump is no normal president.

But it's still too early to preclude the possibility that Trump will, at some point, be forced to leave office. Special counsel Robert Mueller, a former head of the FBI, wants to interrogate the president soon, but Trump has vehemently fought to keep that from happening. Mueller's investigation is primarily looking into whether Trump or his staff are guilty of collusion with the Russian government. Even if those allegations aren't proven, the investigation could still be dangerous for the president.

One suspicion is that Trump actively sought to intervene in the Russia investigation a year ago, with some believing he may be guilty of obstruction of justice. Were charges to be brought, it is unlikely Trump would survive politically. One of the pillars of the obstruction of justice suspicions is a television interview Trump gave last May in which he openly admitted he had fired FBI head James Comey because of the Russia scandal. Initially, he had claimed that he had only fired Comey based on the Justice Department's advice.

Mueller is also investigating possible money laundering deals by Trump and his family.

Ten years ago, Trump's son courted investors from Russia to secure project financing. And money did, in fact, pour in, but not always from reputable sources. In 2008, Trump also sold a mansion in Palm Beach for just under $100 million to Russian oligarch Dmitry Rybolovlev, who is close to Russian President Vladimir Putin and owned one of the country's biggest potash businesses at the time. It also happens that Rybolovlev's name popped up in the "Panama Papers" in the context of offshore bank accounts.

Mueller assembled a team of money laundering experts in order to find out if Trump has made himself vulnerable to blackmail as a result of his ties to Russia. German-owned Deutsche Bank, whose clients include Trump and his son-in-law Jared Kushner, is also the subject of the investigations.

The probes into the family's business affairs could damage the president's image and, as such, also the Trump brand given that their company lives largely from the sale of property, perfume and clothing bearing the Trump label. He could quickly lose any interest in the office he holds.

Already, Trump is spending more time in front of the three televisions in his bedroom than he used to. His work day often doesn't begin until 11 a.m. Before that, his private schedule tends to be filled with "executive time." The news website Axios has reported that those hours are usually spent watching talk shows, making phone calls and tweeting.

Things probably won't get any quieter in the coming months, either, given that further books are coming out soon. One of them is Comey's tell-all, "A Higher Loyalty," which is due out at the beginning of May. Washington is greedily awaiting the next scandal.

Five Maps and Charts That Tell the Story of 2018

By Jacob L. Shapiro

Almost a year ago to the day, we wrote an article titled "The Geopolitics of 2017 in Four Maps." The premise was simple: We picked out four of the best maps our graphic designers (TJ Lensing, Jay Dowd, and Mandy Walsh) had made in the past year. We selected the maps based not only on how awesome they were, but also on how closely they linked to our predictions for the year ahead. As it turned out, that article was one of our most popular in 2017.
We return this year with a similar concept in mind. Here is some of our best graphic design work from the past year, with an explanation of why each graphic is crucial for understanding the geopolitical forces to watch in the year ahead.

Map 1: The Coming Conflict Between China and Japan

Source: Geopolitical Futures  (Click to enlarge)

2017 was not kind to certain aspects of our East Asia forecast. (Here is our report card on last year's forecasts.) We expected the US to launch a pre-emptive strike against North Korea’s nuclear program. The strike never materialized, in large measure because of objections by South Korea, which is unwilling to sacrifice Seoul to keep the US out of range of Kim Jong Un’s missiles.

We don’t expect that to change in 2018. There will be no repeat of the Korean War. At most, the US will launch a limited tactical strike to slow North Korea’s progress toward a deliverable, long-range nuclear weapon. In other words, the world is going to get used to the idea of a nuclear North Korea. That takes the focus in the region away from the back-and-forth threats between Kim and US President Donald Trump and places it firmly on the Sino-Japanese relationship.

Theirs is a relationship that has remained steady for many decades, and with good reason. After all, China and Japan have many economic interests in common. But a nuclear North Korea changes the game. It would signal to Japan that a US security guarantee is perhaps not worth what it once was—and that means Japan will become more aggressive in pursuing its own interests. It would signal to China that the US is all bark and no bite, and that Trump is a paper tiger. 

In 2017, Xi Jinping became the newest dictator in China, and Shinzo Abe pulled off a stunning electoral comeback in Japan, cementing his mandate for years to come. They are two powerful leaders of two powerful countries with a history of mutual mistrust and a hunch that the US is too self-absorbed to throw its weight around in the region the way it used to. That means China and Japan will begin competing with each other directly—on the Korean Peninsula, in Southeast Asia, and as shown above, in areas that both claim for themselves.

Map 2: Persia Rises

Source: Geopolitical Futures (Click to enlarge)

The Middle East in 2017 was all about the war against the Islamic State. It created strange bedfellows. Russia coordinated its military activities with the United States. The cooperation between Turkey and Iran, historical rivals, was unprecedented. The Arab states put aside their differences and their disdain for the Bashar Assad regime and devoted their resources to the Islamic State’s defeat.

As it turned out, the war was successful. IS no longer holds meaningful territory in the Middle East—just a few isolated pockets in Syria and Iraq. The victor of this war was Iran, which is poised to be the most consequential actor in the region in 2018. As the map shows, Iran has at various times been powerful enough to dominate the Middle East. The Islamic State’s defeat is Iran’s best chance to realize its regional ambitions.

Everything is set up well for Iran. Its influence over its old nemesis Iraq has become quite strong. The preservation of the Assad regime means the preservation of one of Iran’s most powerful allies. The end of the war against IS means Hezbollah can retreat from the battlefield and get back to ruling Lebanon… and causing problems for Israel. And all of this means Iran’s dream of projecting power out to the Mediterranean is within its grasp.

We don’t expect Iran to complete its objectives. First of all, Iran’s geography makes power projection difficult, even with significant allies in the region. But second and more important, Turkey is stronger than Iran. However, Turkey is not yet ready to assert that strength. That means 2018 will belong to Iran. It must make its moves now if it is to press its advantage successfully. In the long term, a new Persian empire will fail to materialize. But in 2018, Iran’s pursuit of empire will define Middle Eastern affairs.

Chart 3: Oil’s Glass Ceiling

Source: Geopolitical Futures (Click to enlarge)

This chart shows the range of break-even oil prices for new wells in the US Lower 48, the Gulf of Mexico, and Canada. For many of these wells, the break-even point has dipped well below $60 a barrel. And that means 2018 is going to be another year of oil prices that are too low to solve the fundamental problems of Iran, Saudi Arabia, and Russia in particular.

At the time of writing, oil prices have actually spiked to near $70. There are a host of reasons for this: cold weather, political uncertainty, and an unexpectedly large decline in US crude stocks. The thing to keep in mind is that even with many OPEC nations respecting crude production cuts, supply will outweigh demand in 2018.

For Iran, that means less money to spend on its adventurism abroad. For Saudi Arabia, it means more political upheaval as the young, new crown prince attempts to do what no Saudi ruler before him has been able to do: make Saudi Arabia more than an artificial state held together by oil profits. For Russia, it means a choice between cutting social spending, cutting defense spending, or running its economy into the ground (none of which are particularly savory options from Moscow’s point of view).

Absent a major event that knocks out one of the main crude producers—and we don’t see such an event happening in 2018—we expect oil prices to remain around the $60 range, perhaps even slightly lower. We can’t predict the exact price, but we can predict continued problems for oil-dependent states as well as record-high levels of US production.

Map 4: Shuffling Deck Chairs on Europe

Source: Geopolitical Futures (Click to enlarge)

Perspective maps are my favorite kind of map that we make. Even the subtlest change in perspective can completely alter the way you view a situation. This map of Europe from the United Kingdom’s perspective is a case in point. It also happens to highlight some of the issues we expect to dominate European affairs in the year ahead.

The UK is going to leave the European Union in 2019. 2018 will feature a great deal of political melodrama as negotiations between the EU and UK occupy headlines. But the headlines will not capture the issues of real importance. What matters is not whether there will be a UK-EU trade deal. We expect there will be simply because the EU (i.e., Germany) trades a lot with the UK, and the UK in turn trades a lot with the EU. It is in neither side’s interests to fail to reach an agreement.

But the UK’s exit means London’s foreign policy toward Europe must now revert to a prior form. We’ve already seen the beginnings of this process with the recently signed Polish-UK defense treaty. What’s the goal for the UK? To ensure that no country on the European continent becomes strong enough to project power across the English Channel.

Another intriguing element of this map is that at its center are two countries whose relationship more than any other will define EU affairs in 2018: Poland and Germany. Poland is fed up with Germany’s disproportionate influence in the EU and is nervous about what losing the UK, a counterbalancing force to Germany within the bloc, will mean. The EU will be tested in several areas, and separatism won’t go away, but the Polish-German disagreement on the EU’s future will be the most important issue to watch.

Chart 5: NAFTA’s Resilience

Source: Geopolitical Futures (Click to enlarge)

NAFTA negotiations are heating up so much that even Canada is becoming a tough negotiator. Jokes aside, one of GPF’s major forecasts for 2018 is that NAFTA will remain in place, despite whatever threats are bandied about or whatever letters of intent Trump signs. This chart goes a long way toward explaining why.

The only way we know to analyze highly politicized debates like the one surrounding NAFTA is to tune out the rhetoric. Interests take precedence over words and politics. And the interests here—for all three countries—require that NAFTA stay in place. The chart shows very clearly why this is the case for Canada and Mexico—trade with the US is an overwhelmingly important part of their economies. 

But the chart doesn’t quite say everything about the US angle. US trade with NAFTA partners is large, but it doesn’t come close to US trade volumes with the rest of the world. We can’t forget, though, that the US is made up of 50 states, and two of the most influential of those states—California and Texas—are deeply invested in NAFTA’s continued existence. And California and Texas are by no means the only states whose economies rely on trade with NAFTA partners.

As with the Brexit-EU negotiations, expect a good deal of political soap opera performances around NAFTA, especially on the question of whether Trump will try to take the US out of the trade pact unilaterally (a step that is as likely to lead to years of domestic litigation as it is to an actual US exit). Expect also that at the end of the day, NAFTA will remain in place, no matter how badly the three sides insult each other.

These are some of GPF’s best maps and charts of 2017, and each sheds light on what will be the important stories in 2018. China and Japan will compete for power in Asia. Iran will try to reshape the Middle East to suit its interests. Oil prices will remain too low for Iran’s, Saudi Arabia’s, and Russia’s liking. Poland and Germany will square off over who gets to make the rules in Brussels, while the UK will go back to being an outsider, working to balance powers on the Continent. And NAFTA, for all the political drama to come, will remain in place. It should be an interesting year.